Five Factors That Affect Your Credit Score

Factors which affect Credit Score and Keeping a good credit score is mandatory for paying low interest rates on the loans you take in the future.

Credit score is a thing that is not to be taken lightly. Keeping a good credit score is mandatory for paying low interest rates on the loans you take in the future. If your credit score is not satisfactory, your application for a loan or for another credit in the future might be rejected. Other organisations such as insurance and utility companies have also begun to examine a person’s credit score before making decisions about them. Even organisations before hiring people have started to check the credit score of the applicant first.

Maintaining a Good Credit Score is of Utmost Importance. The factors that Affect a Credit Score are:

History of credit bill payment: The history of credit bill payment of a customer affects approximately 35 percent of the credit score. If as a credit card holder, you are making all the payments on time, your credit score will remain good otherwise it will suffer and will worsen with time. Some of the factors that can negatively affect your credit score which are related to credit history are:

Declaration of bankruptcy.

Foreclosure

Declaration of charge-off. A charge off is nothing but the debt that is very unlikely to be collected.

Tax liens. A lien is imposed by the bank on a property to collect the tax on it.

To ensure that you have a good credit score, keep your credit history neat and tidy by not defaulting on payments. A few late payments are fine but do not make it a habit as it will damage your credit score to quite an extent.

Amount of debt: The amount of debt on a person also affects his or her credit score. In fact, amount of debt a person has, affects 30 percent of the credit score. The different factors credit score companies look at in relation to the amount of debt you owe are as follows:

Credit utilisation rate: Credit utilisation rate is defined as the ratio of credit card balance to the credit card limit. Credit utilisation rate should remain healthy for it to have a positive impact on a person’s credit score. A person should ideally use up to 30 percent of the credit limit. This will keep the credit score in good shape.

Loan utilisation rate: Another factor that affects the credit score is the loan utilisation ratio. Loan utilisation ratio is nothing but the ratio of loan balance to the the amount taken for loan in the first place.

Score, you can prevent it by making payments. This will improve your credit score rapidly.

Age of the credit history: Age of the credit history is another important factor that can have a massive effect on the credit score of a person. Age of credit history is the number of years that have passed since you opened your first credit account. Age of credit history of a person affects 15% of the total credit score. The credit score companies like CIBIL or FICO also take into consideration the average number of years for which you have been holding a credit account in addition to the number of years that have passed since you opened your first credit card account. Having a higher average age in holding a credit card account results in a good credit score. If a person has opened and closed a good amount of credit card accounts, the average credit card age will decrease which will result in the credit score being negatively affected.

Variety of credit available in your report: The two different type of credit accounts are revolving accounts and installment loans. In an installment account, a fixed amount of money is borrowed and a fixed amount of money is to be repaid at regular intervals of time. Over a period of time, as payments are made, the loan amount to be paid decreases. Examples of an installment account include home loan, car loan etc. In a revolving account, the credit can be borrowed only up to a certain limit. Like an installment account, as the payments are made, the amount of money to be repaid decreases. The only difference between an Installment account and a revolving account is that as you make payments in a revolving account, you can continue to borrow money.

If a person has both the installment credit account and revolving credit account, it will mean good things as far as credit score is concerned. Varying the loans you take will also positively impact the credit score. For instance, if a person has opted for a home loan and a student loan in addition to holding a credit card, the credit score will go up if he or she makes all the payments on time. The share of holding a variety of loans has up to 10 percent effect on your credit score.

Credit inquiries made by the credit card holder: Submitting an application for making inquiries to a credit score company to get your credit score will affect your credit score negatively if you do it too many times. Inquiries affect 10 percent of the total credit score of a person. Note that checking your credit score by yourself does not come under making an inquiry to check the credit score. Another point to be observed here is that any inquiries made in the previous 12 months are taken into consideration. Any inquiries that are made more than 24 months earlier are completely wiped off the Credit Report and does not affect the credit score at all.

Factors that Have no Effect on Your Credit Score

Contrary to popular beliefs, some factors have absolutely no effect on the credit score. These are:

Bank balance of the applicant.

Age of the applicant.

Status of employment of the applicant.

Marital status of the applicant.

Overall, if a person keeps on check the factors mentioned above that have an effect on the credit score, he or she can keep the credit score healthy and in check.

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A credit score is important as it represents your financial health and helps banks and Non-banking financial companies (NBFC) to understand your repayment capacity. It is a three-digit number between 300-900, 900 being the highest, that represents an individual’s creditworthiness.

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